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Ballooning Pension Gap Forces MBTA To Weigh Options

Faced with a report that the MBTA's pension fund will need about $1 billion over the next 18 years to remain solvent and fulfill its obligations, the T's Fiscal and Management Control Board on Monday was presented with three options.

"The MBTA Retirement Fund is in danger of running out of money. Even as financial markets have fully recovered from the downturn in 2008 and 2009, fund assets at the T are down 23 percent in the last 10 years," MBTA Acting General Manager Brian Shortsleeve said. "The coming years will require increasingly large taxpayer contributions as well as MBTA employee contributions to keep the fund afloat."

An MBTA lawyer on Monday told the FMCB that the T's possible paths forward include negotiating changes to pension agreement terms through the collective bargaining process with its largest union, pursuing arbitration or asking the Legislature to step in.

As MBTA pension assets have declined by 23 percent in the last decade, the contribution from the T has increased 135 percent from $37 million in fiscal year 2007 to $87 million in the current budget, according to the T.

In the last decade, there has been $1.7 billion paid out of the fund and $740 million in contributions, Shortsleeve said.

In 2007, the fund had $1.92 billion in assets and was 92 percent funded. The preliminary estimates for 2016 show that the fund has $1.48 billion in assets and enough money to meet 58 percent of its long-term obligations to retirees, according to the T.

Without action, the funded level is expected to fall below 50 percent within five years, according to the T report, and the fund would need $3 billion in funding to meet its obligations through 2035.

Part of the problem is that since 2010 the T has had more retirees drawing from the pension fund than employees paying into it. Now, there are 899 more retirees drawing money from the pension than there are employees paying into it, according to the T.

"The difference needs to be made up in investment returns or the value of the pension will fall, that's just simple math," he said. But he also acknowledged that "market returns will not be enough to save the fund."

The fund got a 6.2 percent return on its investments in 2016, according to preliminary figures, a 0.7 percent return in 2015, and a 4.8 percent return in 2014 — each falling short of the fund's 7.75 percent target return. In 2012 and 2013, respectively, the fund saw returns of 14 percent and 16.4 percent.

James O'Brien, president of the Carmen's Union Local 589 and a member of the MBTA Retirement Fund board, addressed the FMCB and suggested the T is fudging its numbers to cut costs.

"The MBTA again presents carefully selected statistics in an attempt to justify its goal of cutting the amount of money MBTA retirees will have to live on. The means of doing this is to disparage the MBTA Retirement Fund and say it is performing badly," he said. "The truth is the 30-year average return is over 9 percent and the five-year average return is over 8 percent. The MBTA projects a 4 percent return over the next 10 years to scare people. Why else present a figure that does not accurately reflect the historical returns of the fund?"

Evan Inglis, an actuary who helped the MBTA compile the report presented Monday, said he arrived at the projection of 4 percent annual growth for the next 10 years based on the pension fund's investment mix, investment strategy and the state of the economy.

"This is not a pessimistic view of the future or kind of a downside scenario that we want to plan for," he said. "This is a reasonable expectation."

MBTA General Counsel John Englander told the FMCB that the MBTA can proceed in one or more of three ways: The T can negotiate with its largest union to alter the terms of the pension agreement, it can initiate a process for binding arbitration, or it can turn to the Legislature to intervene.

Englander said Shortsleeve "is ready" to negotiate with the carmen's union over the pension agreement and "would like to start that as soon as possible."

The FMCB took no action related to the pension fund Monday.

Shortsleeve suggested that the way the T pension plan is set up may need to change to help keep it solvent. He said the plan provides an incentive for T employees to retire younger, and half of MBTA employees retire and begin to draw on their pension while in their 50s. He also noted that T retirees "earn significantly more in post-retirement pension benefits than state employees and teachers at all ages."

One other possible solution, Shortsleeve said, is to use authority expected to be included as an outside section in the fiscal year 2018 budget to allow the Pension Reserves Investment Management Board to manage the investment of the MBTA Retirement Fund.

The state pension fund managed by PRIM reported a 7.6 percent return in 2016, compared to the T pension fund's 6.2 percent return.

Gov. Charlie Baker has previously recommended the MBTA Retirement Fund be merged into the account managed by PRIM, and his fiscal 2018 budget proposal included an outside section allowing such a merger. The House and Senate have both included the provision in their own budget proposals as well.

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